Research & Commentary: Tennessee’s Transportation Funding

Published August 31, 2015

Tennessee Gov. Bill Haslam recently began a barnstorming tour across the state promoting additional funding for state transportation and road projects. One of the suggestions being discussed would implement the first increase in the state’s gas tax since 1989.  

Tennessee’s gas tax is 21.4 cents per gallon, including 1.4 cents for a special petroleum fee. The tax raises $657.8 million annually. The funds from the tax are divided between the state and local governments, with 12.8 cents of the 21.4 cent gas tax going to the Tennessee Department of Transportation (TDOT) and the remainder going to cities and counties and the state’s general fund. Compared with other states, Tennessee’s gas tax is low, ranking 40th, but it is high for the region. Alabama, Mississippi, and Missouri are three neighboring states with lower gasoline tax rates than Tennessee’s.

Critics of the gasoline tax increase proposal say legislators should not use the current dip in gasoline prices as an excuse to hike taxes, and they note a tax hike would raise prices not just on gasoline but also on goods and services throughout the economy. These increased costs, passed on to consumers, would have a stronger effect on lower- and middle-income families, acting as a regressive tax hike. Tennessee households earning less than $50,000 per year currently spend more than 20 percent of their after-tax income on energy, according to Americans for Prosperity (AFP).

The main problem with transportation funding lies not with revenue but with spending. Far too many dollars are spent on projects unrelated to roads, such as bike paths and museums. “We spent $120 million recently on the Tennessee State Museum, but our roads are in disrepair and our bridges need to be fixed. Take care of the essentials first,” Americans for Prosperity Director Andrew Ogles told Tennessee Watchdog. According to the Tennessean, TDOT funds from gas taxes were on multiple occasions routed to the general fund, including between $30 million and $65 million annually from 2001 through 2007 to cover state budget shortfalls resulting from TennCare overruns.

If gas taxes are intended as a user fee, gas tax dollars should be spent only on roads and bridges. In The Wealth of Nations, Adam Smith argues when infrastructure is constructed and maintained using user fees , new construction occurs only when demand justifies it.

As the rise in fuel efficiency continues, motor-fuel tax revenues will continue to decline. States and the national government will have to explore more modern and efficient ways to fund road construction and traffic infrastructure. These include privatizing roads and establishing toll systems. In several cities, transportation agencies are using congestion pricing – varying toll prices based on congestion – to manage demand and limit traffic problems.

The following documents provide additional information about how motor-fuel taxes are applied and their economic effects.

Tennessee Gov. Haslam Campaigns for Gas Tax Hike
D. Brady Nelson writes in The Heartlander about Tennessee Gov. Bill Haslam’s (R) campaign across the state for the first gasoline tax increase in 25 years. The tax would raise money for proposed increases in state infrastructure spending. Several critics of the hike are quoted as arguing state governments should set spending priorities before seeking tax hikes. 

State Motor Fuel Taxes: July 2015  
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel).

Alternatives to the Motor Fuel Tax 
This report, submitted to the Oregon Department of Transportation and prepared by the Center for Urban Studies at Portland State University, evaluates potential alternatives to motor-fuel taxes. The report also analyzes the economic and technological problems that must be addressed when designing alternative revenue sources. 

Designing Alternatives to State Motor Fuel Taxes 
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes as more fuel-efficient vehicles become available. They report on the economic effects of road pricing as a substitute for fuel taxes. 

Paying at the Pump: Gasoline Taxes in America 
Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation improvements.  

Reconsider the Gas Tax: Paying for What You Get
Jeffrey Brown of the University of California-Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of this purpose and lump it together with other unpopular taxes. The challenge for policymakers, he argues, is to restore the connection in the public’s mind between the tax and the roads it should provide. 

Research & Commentary: Congestion Traffic Pricing–commentary-congestion-traffic-pricing?source=policybot
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under congestion pricing, operators of a road charge a variable price based on congestion, allowing the operator to manage demand and limit congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.  

Fuel Taxes, Tolls Pay for Only One-Third of Road Spending 
Joseph Henchman of the Tax Foundation finds highway user taxes and fees made up just 32 percent of state and local spending on roads. Financing for the rest of the projects came out of general revenues, including federal aid.

Raising Gas Taxes Won’t Fix Our Bridges 
In the aftermath of the I-35 bridge collapse in Minneapolis, Adrian Moore of the Reason Foundation argued increasing fuel taxes should not be the only response to state transportation funding problems. He wrote, “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.” 


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Environment & Climate News website at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database,

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